June 3, 2013
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June 3, 2013

The Wander Years: For Europe’s Big Three, the current decade is off to a miserable start

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The Wander Years: For Europe’s Big Three, the current decade is off to a miserable start

In the aftermath of the 9/11 terrorist attacks, Europe’s Big Three airlines—Lufthansa, Air France and British Airways—were feeling good about themselves. Profits recovered quickly, their U.S. counterparts were in a death spiral and Gulf carriers were not yet a major threat.

Then came the fuel spike of the mid 2000s. Europe’s Big Three, while not exactly dazzling with their profit margins, were again in a relatively good position. Their acquisitions had led to at least some healthy consolidation, their fuel bills were cushioned by hedges and strong local currencies, their global networks were enjoying an unprecedented boom in intercontinental demand, their cargo and maintenance units were prospering—and again, their fragmented U.S. counterparts remained bloodied and bankrupt.

Then the world changed. Starting with the Delta-Northwest merger in 2008, the U.S. airline industry consolidated to a far greater degree than what Europe had earlier achieved. Intercontinental demand collapsed during the great recession. Shorthaul markets became more profitable in the U.S. with ancillary revenue help and more unprofitable in Europe as LCCs expanded. U.S. carriers relentlessly cut capacity while Europe’s Big Three dithered. Carriers on both sides of the Atlantic benefitted from new joint ventures with each other, but for the U.S. side, that was good enough to drive longhaul prosperity—for Europeans the benefits were offset by ever-intensifying assaults from Emirates, Turkish Airlines, Qatar Airways and Etihad.

Europe never did recover from the global financial crisis, not even gradually. Instead, the crisis exposed a series of sovereign debt shocks, which morphed into gloomy recession. Governments responded with fiscal austerity that included sharp tax increases on air traffic, higher airport fees and a jump in air navigation charges. They also imposed curfews, passenger rights penalties, roadblocks to airport development and a response to a volcanic ash cloud that made a bad situation a whole lot worse.

LCCs, meanwhile, haven’t stopped growing. Ditto for Turkish and the Gulf carriers, one of which (Etihad) obstructed industry rationalization by saving Air Berlin. Even after multiple Big Three merger deals—some of which have since gone sour—Europe’s airline sector remained highly fragmented. And Europe’s airline industry as a whole, by IATA’s count, had the second worst financial performance of any region in the world last year. Only airlines in... (390 of 1,559 words)

Also Inside this Issue:

Boeing’s Dreamliner is back in the headlines again, and this time the news is all good. B787s are flying once more. New airlines are taking deliveries. As things stand now, a stunning 900 have been ordered. And last week, Singapore Airlines conferred its valued endorsement on the latest version: the stretched B787-10.

But Airbus is holding its own with the A350, itself having gleaned 600-plus orders from many of the world’s most esteemed carriers, including Singapore Airlines. Last week, in fact, Singapore added as many as 50 additional units and now has 70 firm orders—only Qatar Airways and Emirates have as many. What’s more, it can convert options to the largest version, the -1000, eyed as an eventual B777-300ER replacement.

Airlines are just as eagerly buying narrowbodies, namely planes from the A320-NEO and B737-MAX families. TUI, a large European tour operator, became the latest to place a mega-order, in its case for potentially 150 units.

Aeromexico, a big B787 and B737-MAX customer itself, made news of a different sort last week. It reached a last minute contract deal with flight attendants to avoid a debilitating strike.

Farther south in Latin American, meanwhile, Gol raised the intriguing possibility of linking Brazil with Africa using narrowbodies—and yes, it too has lots of B737-MAX jets on order. Gol’s suggestion comes at a dynamic moment for Brazilian aviation: Azul is going public, airports are expanding, the World Cup and Olympics are coming and foreign airlines are launching new intercontinental flights.

This week in Cape Town: IATA’s annual meeting.

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